A few months ago, I noticed a small pool of water on my bathroom floor. Just as many people would do in that situation, I mopped it up. I thought nothing more about it. Why would I? Water on a bathroom floor is quite normal. It’s a bathroom, after all. A few weeks later, another tiny splash of water appeared. Again, the amount of water bordered on insignificant. And again, I quickly ran a sponge over it. Something’s wrong Then one day my neighbour knocked on my front door to ask if I was having problems with my plumbing. Oops!…
A few months ago, I noticed a small pool of water on my bathroom floor. Just as many people would do in that situation, I mopped it up. I thought nothing more about it.
Why would I? Water on a bathroom floor is quite normal. It’s a bathroom, after all.
A few weeks later, another tiny splash of water appeared. Again, the amount of water bordered on insignificant. And again, I quickly ran a sponge over it.
Then one day my neighbour knocked on my front door to ask if I was having problems with my plumbing. Oops! Were those splashes of water I had seen a sign of something more sinister?
That said, there was nothing obviously wrong, apart from those two tiny puddles.
Shortly afterwards, though, things did start to get serious.
I woke up one morning to find the bathroom ankle-deep in water. The flooding was so severe that it had seeped into the bedroom.
Plumber after plumber came to investigate – 14 in total. There was a lot of shaking of heads, rolling of eyes, sucking of teeth and wringing of hands, not to mention mops.
Eventually, the source of the problem was identified. A concealed pipe behind one of the bathroom walls had burst.
Thankfully, the problem was quickly fixed.
But what does my plumbing problem have to do with investing?
At the start of this year, I pointed out that rising interest rates in the US could become an issue for other parts of the world. It could be especially troublesome for some developing economies.
At first, the outflow of money from emerging markets started as a trickle. It then turned into a full-blown flood.
So, the sell-off in emerging markets that we witnessed should not have come as a massive surprise.
AFC: The Sequel
Argentina, Turkey and Egypt were hit hard. But it didn’t stop there. India, Indonesia and China were tarred with the same brush….
…. Over 80 stocks on the National Stock Exchange of India hit 52-week lows. Chinese shares have still not quite recovered since entering a bear market in June.
And the Indonesian rupiah fell to its lowest level since the Asian Financial Crisis of 1998.
These are hardly small economies. China is the second-largest economy in the world; India is the world’s largest democracy and Indonesia is Southeast Asia’s largest economy.
So, the sell-off prompted some to suggest that “AFC: The Sequel” could be just around the corner.
The contagion they said was spreading. Other Asian markets – even our Singapore shares – were affected.
The smell of fear
There was a detectable smell of fear in the markets.
The culprit is QT or Quantitative Tightening. The Fed is reducing the supply of money by raising interest rates and withdrawing the swathes of cash it had created after the financial crisis of 2008.
But QT is also tightening the noose around the necks of many Asian countries. It sucked money out of their economies.
The situation was not helped by America’s trade dispute with just about every man and his dog.
It is very disrupting for global markets. It could even cause slowdown in some economies in Asia.
The upshot is that many Asian stock markets have been affected.
But here’s the thing: Some wonderful companies are now valued at below what I believe I could collect in dividends over the long term. In other words, they are selling below their intrinsic value.
Of course, they could get even cheaper.
But as investors, our jobs are to forecast the yield on assets over the lifetime of those asset. It is not trying to guess what the market might do next. That is speculation.
I’ve been buying shares, whilst the going was good. I am buying more. You should think about doing so, too.
A version of this article first appeared in Take Stock Singapore.
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